International Trade in

Agriculture Commodities
 The principle of comparative advantage
- compare the opportunity costs of producing
a commodity between the countries
- we consider the cost of producing additional
units of any one product in terms of reduction
necessary in the output of other good
- to produce additional units of crop x, the
country has to rearrange its resources in such
a way that it might have to relinquish the
opportunity to produce some unit of crop y.
International Trade in
Agriculture Commodities
- import goods for which the
international price is less than the
domestic opportunity cost of producing
an additional unit at home
- export products for which the
international price is higher than the
domestic opportunity cost of producing
an additional unit
International Trade in
Agriculture Commodities
 International trade rests on possible
difference among countries in the rates
at which production of one item can be
replaced by another through internal
reallocation of resources
 Principle of comparative advantage is
symmetrical.
International Trade of Ag.
Commodities - Indian context
 Till 1990, international trade in agriculture
commodities was perceived as residual
phenomenon
- Based on difference between domestic
production and effective demand
 It was controlled by Govt.
- quantitative restrictions: quotas, minimum
export price
- canalization: trade only through State
Trading Corporations (STCs)
International Trade of Ag.
Commodities - Indian context
 Rationale for protected trade
- to maintain the domestic prices of
agriculture commodities at a level that
are commensurate with average income
- stability in domestic prices
- balance of payment constraint
New Agriculture Trade Policy
 All Agriculture imports other than cereals,
oilseeds and edible oil have been decanalised
 All agricultural exports, except onion have
been decanalised
 Pulses, paddy and coconut: licensing
 Sugar, cotton: quantitative ceilings
 Groundnuts, tobacco: minimum export price
Measures of International Price
Competitiveness
Item Value of Output Value of Input
T NT T NT
--------------------------------------------------------------------------------------------
Domestic A B C D
Price
Economic Price
(a) Border price E - G -
(b) Opportunity - F - H
cost

Nominal Protection Coefficient (NPC) = A/E

Effective Protection Coefficient (EPC) = (A-C)/(E-G)
Effective Subsidy Coefficient (ESC) = [(A-C)+(H-D)]/(E-G)
Domestic Resource Cost Ratio (DRCR) = (H-F)/(E-G)
Border price
 Exportable item:
- the domestic good competes in a
foreign port
- relevant border price is f.o.b price (say
at New York), net of the transportation
cost (domestic and international), port
clearance charges, marketing costs.
Border price
 Importable items:
- the competition is supposed to be
taking place in a domestic port
- relevant border price to be compared
to farm gate price would be c.i.f price at
our port plus port charges, domestic
transport cost and other handling &
marketing cost.
Nominal Protection Coefficient (NPC)
 A value of NPC greater than unity
means government is protecting the
commodity
- (under free trade, the price would be
lower)
 A positive value of (1-NPC) would
measure the degree of competitiveness
of the commodity
Effective Protection Coefficient (EPC)
 Calculation of EPC requires knowledge of
input structure for the commodity
 In calculating the denomination of EPC, the
border price of tradable inputs must always
be calculated under the importable
hypothesis.
 If value of EPC>NPC ?
- the domestic processors cum traders are
being accorded protection to tradable inputs
through govt. policy as they are realizing
higher profits as compared to free trade.
Effective Subsidy Coefficient (ESC)
 Subsidies on non-tradable inputs
(electricity, irrigation, credit) exist.
 It takes care of distortions in the
markets of both tradable and non-
tradable inputs
 It is the most complex measure of
competitive analysis
Domestic Resource Cost Ratio
(DRCR)
 It computes the value of domestic primary
and non-tradable resources in order to earn
or save a unit of foreign exchange through
production and exchange of the commodity
 A value of DRCR less than unity implies that
the industry is using less of domestic non-
tradable resources as compared to value
addition through use of tradable resources.
- Hence the industry is said to be
internationally competitive from the social
welfare point of view.
Issues
 Competitiveness (cost and quality)
 Robustness (sensitivity analysis)
- international price (highly fluctuating)
- international transport cost
- domestic cost of cultivation
 Mechanisms to increase exportable surplus
 Impact on domestic economy – safety nets
 Benefit distribution